Demonetization: It Was In The Books

Some regard it as a progressive policy, but others call it a blunder. But it was perhaps pre-planned.

The demonetization policy has raised some logical questions. One of the many popular questions is whether demonetization would have fared better if it would have been implemented after substantial financial inclusion in India. Or, is there no ‘good time’ for reforms?

The Reserve Bank of India says that India is gradually heading towards financial inclusion within the folds of banking and financial institutions. Data shows that approximately 50% of the population is holding accounts at financial institutions in India, even though the numbers are much lower than Germany or the UK or the BRIC economies. The numbers aside, India’s progress from 2011 has been drastic and the large jump since then, has been commendable. One argument is that demonetization was probably necessary; financial inclusion happens automatically through the policy. Anyone holding invalidated notes would have to come forward to exchange or deposit them, and this is where would arise a need among those having no bank accounts to open one. Assuming that demonetization would have achieved stupendous success had financial inclusion been significantly achieved, does not give a convincing reason to delay the recent policy. A somewhat side-lined, and yet important reason is the cost of cash. India’s love for cash, which is demonstrated through a thriving cash economy estimated at around $3.5 billion , is proof of that. In support of this, penetration of bank accounts in India increased to 53% in 2014 from 35% in 2011.

Financial inclusion has been the corner stone of every five-year plan in the economy, since the past decade. The launch of one of India’s primary social service initiative, the Aadhar card which boasts about 100 crore members, is a step toward financial inclusion, and to add, the Pradhan Mantri Jan Dhan Yojana that opened 24 crore accounts is an additional push to encourage people to open bank accounts.

One can conclude that these (pre-planned) reforms could be a precursor to the demonetization move, since exchanging and depositing old notes would not create a challenge by leaving anyone devoid of the opportunity to be included in the banking system. These initiatives seem to be parts of the bigger plan which is financial inclusion. Rather than perceiving demonetization as an abrupt and a radical reform, bold in its nature and less lenient in its imposition, one must look at it as part of a bigger initiative, that has been in place for several years, and which has been comparatively slow in reaping results. The policy would make recognition easier, corruption difficult, make direct benefits to the poor grow, and simultaneous credit growth and subsequent net positive GDP growth could create a strong and unshakable foundation for the next few decades, for perpetual growth.

There is never a good time to introduce good policies; but, anything that takes the economy towards a path of delivering continuous improvement for those who have little, must be regarded as a progressive step. If the claims of demonetization are to be assumed fair, these reforms together in their combined impact can be considered the biggest ever battle won in terms of bringing financial integration to the economy. The answers do remain inconclusive and indefinite. Financial inclusion and demonetization come with strings attached in the form of extra monitoring and regulation. Both policies could be viewed as fierce yet compassionate weapons for encouraging many and forcing some to be a part of the financial system, with hopes of equality and justice and collaborative growth.